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Pentagon Gives Boeing New Chance at Contract

The Pentagon announced on Wednesday that it would reopen bidding on a $35 billion contract for midair refueling tankers, allowing Boeing to continue its effort to wrest the business from a partnership of Northrop Grumman and the European parent of its rival Airbus.

Defense Secretary Robert M. Gates said that the tanker contract, which was won by the partners Northrop and the European Aeronautic Defense and Space Company in February, would not be awarded until the Pentagon reviewed the rival bids again.

The companies have battled fiercely to land the Air Force’s largest contract, with a potential value of $100 billion. The struggle has been caught in issues of national pride, trans-Atlantic relations and even presidential politics.

Mr. Gates’s action was a public rebuke to the Air Force, which had selected the offering of Northrop and EADS, the parent of Airbus. Shortly after the Air Force made its selection, the Government Accountability Office, acting on a protest from Boeing, said that the Air Force’s decision-making process was flawed and that the tanker contract should be reopened.

In his announcement on Wednesday, Mr. Gates said that a special committee operating out of his office and headed by the Pentagon acquisitions under secretary, John J. Young Jr., would make the final contract selection, not the Air Force.

“I’ve concluded that the contract cannot be awarded at present,” said Mr. Gates, citing the “significant issues” pointed out by the G.A.O.

The contract, in its first phase alone, would provide for 179 aerial refueling tankers to replace the Air Force’s aging fleet, which is being strained by wars in Iraq and Afghanistan and has planes that date to the Eisenhower era. The Northrop team was offering a variation of its A330 plane, while Boeing was offering a modified 767. The tankers are used to refuel military planes while in the sky.

There was no clear winner or loser between the two companies in Mr. Gates’s decision. But it was another blow to the Air Force, whose ability to manage huge weapons-buying programs has been questioned. Two of its top officials were recently fired because of security breaches.

“Clearly, this is a vote of no confidence in the Air Force,” said Loren B. Thompson, a military analyst at the Lexington Institute, a Washington research group.

Howard Rubel, an analyst at Jeffries & Company, said that the announcement meant “that both companies will have an equal opportunity to abuse each other for a while longer.” Mr. Rubel added that until the Pentagon issued a modified request for proposals from the two companies, it would be difficult to determine which might have an edge.

The Pentagon will not reopen the entire contracting process, but will focus on eight problem areas cited in the G.A.O. report, and Mr. Gates said the final decision might be made by December.

But many analysts said that timetable might be overly ambitious. Even Mr. Young, the acquisitions under secretary, said on Wednesday that the decision-making schedule might slip.

Both Boeing and Northrop issued news releases praising Mr. Gates’s action. The House Armed Services Air and Land Forces Subcommittee is to begin hearings into the tanker contract and the G.A.O. report on Thursday.

Photo

Employees working on a 767. Boeing and its rival for an Air Force contract praised a decision to re-evaluate their bids.Credit
Joshua Trujillo/Seattle Post-Intelligencer, via Associated Press

“We welcome the decision by Defense Secretary Robert Gates not to proceed with the contract award to Northrop Grumman/EADS and to reopen the KC-X tanker competitions,” said Boeing, referring to the designation it has given its airplane.

Doug Kennett, a spokesman for Boeing, also said that his company was open to substituting a 777 for its 767 offering, depending on what the new bidding proposal would require.

On the other side, Northrop said that it applauded Mr. Gates’s decision and added that “the United States Air Force has already picked the best tanker, and we are confident that it will do so again.” Ralph D. Crosby Jr., chief executive of EADS North America, said the company welcomed the rebidding and said it was “ready and anxious to get back to work” on the project.

One of the central players in the tanker contract is Senator John McCain, the presumptive Republican presidential nominee.

Several years ago, Mr. McCain stopped the contract from being granted to Boeing, after the terms of a tanker lease arrangement between the Air Force and Boeing were revealed. Some have seen him as favoring a European company over an American one, an impression was not eased by the fact that several of his top campaign advisers had worked as lobbyists for Airbus.

In a statement on Wednesday, Mr. McCain praised Mr. Gates’s decision as a step toward “full and open competition.”

European military suppliers have long thought that the Pentagon has encouraged other nations to buy American military goods, while closing the door to purchases of military equipment made by European suppliers.

And European countries thought the Airbus proposal finally gave them a shot at landing a major Pentagon contract, especially after both the British and Australian air forces picked the Airbus tanker.

In London, Alexandra Ashbourne, who heads Ashbourne Strategic Consulting, an aerospace analysis firm, said Mr. Gates’s decision “was probably the best of all possible outcomes,” but added that EADS felt “very raw” over the whole process, given the amount of effort and expense that went in to putting in a bid, only to see it slip away.

Ms. Ashbourne added that one of the big concerns among Europeans was that the tanker contract would get caught up in the presidential race.

“On this side of the Atlantic,” she said, “there is concern that politics will be allowed to take hold and that Congress will get involved. Then you have pork barrel politics and it is an election year. The timing is very bad.”

In Congress, “Buy America” sentiment fueled outrage at the initial selection of Airbus. But that was also tempered by a fierce political battle on behalf of the European supplier by the delegations of the States of Alabama and Mississippi, where EADS promised to build most of the tankers and create jobs.

Members of Congress on both sides of the issue released statements on Wednesday praising Mr. Gates, but promoting their own positions. Representative Duncan Hunter, a California Republican who is an outspoken advocate for Boeing, said that he wanted to make sure the “mistakes made in the original competition are not repeated.”

Senator Richard C. Shelby, an Alabama Republican who is in the Airbus camp, said that the Pentagon rebid decision was “an appropriate solution.”

Correction: July 11, 2008

An article on Thursday about the Pentagon’s decision to reopen bidding for the contract to build an Air Force tanker plane referred incorrectly to a Congressional panel scheduled to begin hearings on the contract that day. It was the House Armed Services Air and Land Forces Subcommittee, not “a Senate committee.”

A version of this article appears in print on , on page C1 of the New York edition with the headline: Pentagon Gives Boeing New Chance At Contract. Order Reprints|Today's Paper|Subscribe